Posted by The terms BULLISH and BEARISH, and looking at a powerful visual representation of diversification. What does it mean when analysts say they are bullish on a particular market, or even a stock?
I posted a video where I talked about the upside and downside associated with using leverage and went through an example of borrowing for the purposes of investing. In that video, I exaggerated for learning purposes. I put the entire portfolio in a single stock. Doing so allowed me to emphasize a dramatic positive and negative outcome. Of course, any adviser worth his or her salt would never recommend a client actually do this. Diversification is the cornerstone of sound investing. We have already discussed the virtues of diversification in our investment basic video series, available here on our YouTube channel. I’ll put a link to that series in the description below. But I figure that given how important this topic is, another lesson certainly wouldn’t hurt.
In this video, I’m going to discuss the terms bullish and bearish, and then look at a powerful visual representation of diversification. What does it mean when analysts say they are bullish on a particular market, or even a stock? Well, that basically means they think the price will go up. On the other hand, when analysts are bearish on a particular stock, it basically means they think the stock price will go down. Here’s a great little memory aid. Think about how a bull attacks as compared to a bear. A bull strikes its head and horns upwards. So, with the terms bull or bullish, think up. A bear smothers in a downward motion. So, with the terms bear or bearish, think down. I think it’s a cool little memory aid that will help you keep these terms straight. Let me know what you think in the comment section below.
As I talk about in our investment basics series, an investor can reduce risk through diversification by spreading their investment portfolio across different asset classes, industry segments, geographical areas, stocks, bonds, maturity dates, and the list goes on. In this example, I’m going to focus solely on asset class. You’ll notice I have three cups. One is labeled cash and equivalents, and the other is labeled fixed income, and the other is labeled equity. Let’s diversify the portfolio by putting a portion under each cup. Now, if this big, bad bear comes along and happens to negatively impact the equity market, that would suck, for sure, but hopefully our other cups come out unscathed or may even do well. That’s the power of diversification.
Our producer set up this segment because she doesn’t want you or me to know how much she put under each cup. Let’s assume that, once again, the big, bad bear rears its ugly head, but this time it impacts the fixed income market. Let’s take a peak under each cup. Let’s start with the equity cup. Oh, she didn’t put anything under there. Are you nervous? I sure am. What do you want to check next? Well, let’s see how much she put under cash and equivalents. Nothing. This means she put it all under fixed income. Our entire portfolio is exposed, and the bear is going to be well fed, courtesy of our portfolio. As I mentioned at the top of this video, there are many ways and degrees to diversify a portfolio. I know this was a simplified example, but I think it does a great job of demonstrating diversification in its simplest form. I also hope you enjoyed the memory aids. Thanks for dropping by the Coaches Hangout, and good luck on your upcoming exams.
